McKinsey’s economic vision emphasizes microscopic details over fundamentals

A play in need of actors

Lebanon has no difficulty evoking the idea of a circus, or, as we said in the previous issue of this magazine, a political carnival. Our absurdist theater troupe had seemingly perfected its performance of the tragicomedy with the title “Government without Head.”

But in January, there were two new and hopeful twists added to the script. At the end of month, the drama found a resolution with a new cabinet, while earlier in the month the Ministry of Economy and Trade (MoET) surprisingly released the “Lebanon Economic Vision (full report).” It became an instant holy duty for stakeholders in the Lebanese economy to analyze this concise plan, or at least pour over its severely abridged executive summary, containing a mere 150 presentation pages in PowerPoint format.

In contrast to the political script of “Government without Head,” whose anonymous authorship had resulted in much local speculation (was it written by the Americans, Russians, Iranians, Syrians, Saudis, Mary Shelley, or Dr Totenkopf?), the authorship of the Lebanon Economic Vision (LEV) (including the plan’s not inconsiderable number of typographic errors and internal incongruences) resides entirely with a team from international consulting firm McKinsey. 

The devil is everywhere

Much more pertinent for any analysis of the LEV than small deficiencies such as typos is arguably the inclusive reach—the buy-in from all stakeholders across all strata of society—as well as the mandate and the meat, or content, of the economic vision. In regard to the mandate behind the LEV, McKinsey says that a decree by the Council of Ministers from October 2017 deemed that the “vision would aim to grow GDP and create jobs through selection of productive sectors that could become competitive.” Moreover, the same text pointedly mentions that the vision would aim “to understand the government’s role in that regard,” presumably referring to the state’s role in GDP growth and job creation. 

On the issue of inclusive reach, McKinsey declares that some 200 stakeholders across multiple economic sectors were interviewed. It specifies at the start of the document that “pre-work interviews” were conducted in the first quarter of 2018 with: 15 ministers; 30 director generals and regulators; five members of Parliament; members of the country’s Economic and Social Council (Ecosoc); 10 local and international civil society stakeholders; over 20 international experts; 30 professional organizations, i.e., associations, syndicates, and orders; and 75 “Lebanese private sector leaders.” Further down in the presentation, the authors say they “interviewed 200+ stakeholders over a period of 8 months,” and list, on four pages with a total of about 140 entries, the meetings that were conducted with these stakeholders, identifying the researchers’ most important interlocutors by name and organization, and mentioning the remainder with more general descriptions of their affiliations and roles (e.g. “Dr. Joseph Torbey & team from the Association of Banks in Lebanon”).

This commitment to provide a list of meetings is helpful in allowing discerning readers to gain an initial understanding of the stakeholder interactions involved in the LEV’s production. But blind spots are not universally removed. Namely, the length and intensity of an interview with a Lebanese political or economic figure—as Executive knows very well—can vary greatly, but there is no indication of the depth or quality of the insights gained in those interviews for the LEV. Moreover, McKinsey makes no attempt to explain the methodology used in selecting its interviewees or explain why there are only three or four entries recording meetings with interviewees from each the real estate and health sectors whereas there are over 16 entries for each of the industry, agriculture, and public sectors.

In sum, there is no methodological attempt to indicate the width or depth or diversity of views, nor the intensity of the interaction. Instead, the stakeholders identified indicate a significant alignment of the interviewees with the original core owners that commissioned the report. This in turn strongly hints at likely similar biases and the possibility of mentally closed feedback loops, which could have resulted in incestuous inbreeding of the perspectives that were entered into the LEV’s underlying information base, from which the report was composed.

McKinsey does not address, in the released report, how it approached the problem of unwanted opinion loops and myopic perspectives—given the narrow layer of mutually interconnected stakeholders in the Lebanese economy and its very limited pool of outspoken and transparent personalities. It deserves to be noted that the LEV generally offers very little detail about the methodologies applied in its research processes, data acquisitions and evaluations, rationales for assumptions, margins of error, and such.

Turning to the beef

When examining the content of the LEV, a clearly positive aspect of the plan is that McKinsey has incorporated into the vision a structuring and prioritization of the Capital Investment Plan (CIP) portfolio of approximately 270 projects. When the CIP portfolio was presented by the government nearly one year ago, it seemed disorganized. Less discreetly said, the CIP in its February 2018 iteration was a total mess of holdover ideas (many going back to unfulfilled project ideas from the political heritage of the Rafik Hariri era) and unstructured needs, which were put together as project lists without even a level of cookbook coherence.

Now the CIP evaluation by the McKinsey team says that 11 percent of CIP projects, worth $3.4 billion, are mission critical, another 15 percent are high importance, and 25 percent are marginal. It is well noted that the LEV attempts to structure the CIP portfolio into a more coherent workflow, in terms of  order of priority. On the other hand, the projects McKinsey identifies as top CIP priorities are exactly the same priorities that the government had already flagged.

Also worthy of examination are two projects that McKinsey added to the proposed portfolio of Lebanese infrastructure-esque investment projects. Called “flagship projects” in the LEV nomenclature, the two project ideas that were not CIP projects but mentioned in the plan’s CIP-related pages were a Smart Lebanon Knowledge Hub, including a proposed “Smart Village Beirut,” and an industrial infrastructure proposal for establishing a specialized “construction technology zone on the border with Syria.” These particular LEV flagship projects are elaborated on across almost 100 of the LEV’s 1274 “pages” (PowerPoint slides), at the very end of the document.

Unmistakably aimed at capitalizing on Syria’s reconstruction in the country’s projected peaceable future, the construction technology zone idea emits a “pie in the sky” quality, in our perspective. This is not only because of the unpredictable timeline for this zone, due to the fact that Syria remains in conflict—one already projected plan imagined the onboarding of a developer by February 1, 2019, beginning of the zone’s construction by June 1 this year, and its operability by March 1, 2020—but also because a specialized industrial construction zone would require the Syrian state to welcome Lebanese companies with low customs barriers and low informal internal barriers, among other political prerequisites.

There simply does not appear to be any indication whatsoever in January 2019 that this could be achieved without a tradeoff of sovereignty, i.e. if Lebanon agreed to become a province of Syria, then maybe Bashar al-Assad would allow this. Any other solution that would allow Lebanese construction companies to basically take over the reconstruction of a large portion of Syrian housing needs is questionable.

In the LEV pages outlining the Beirut knowledge village, as part of the proposed “Smart Lebanon Knowledge Hub,” there is a curious map in which Mckinsey imagines where such a village might go. This map displays a large—today partly residential, partly commercial, and largely high-price—area under a headline that says: “The Beirut Knowledge Village could be built as an aggregation of several ‘Districts,’ BDD being one of them.”

Dreaming big is a virtue, but what are the chances—and what would be the costs—of transforming an area that stretches from the southern and eastern BDD borders to the Salim Salam highway in Bachoura, and that in its northern portion includes most of Saifi Village and extends up to the neighborhood of the current ESCWA building? Credibility is important when presenting a big dream, and it is hard to see the  value of this Beirut knowledge village when simply examining the area reveals that it is amongst the priciest real estate in Lebanon, and that it lacks any research facility or even small university.

The third flagship project earmarked in the LEV relates to tourism. Splashed out over almost 50 pages (1145 – 1182), this project aspires to create “a seamless end-to-end tourism journey” for the brave tourists who visit the country. The concept of this wholesome experience is as detailed as the word “seamless” suggests. It entails proposals ranging from the idea of developing a Lebanese tourism brand image (which this writer has heard more than once before) to novel ideas for significantly reducing the “queuing time at immigration,” for a digitized entry card for foreigners, for data capture, for environmental preservation as part of tourism strategy, and much more.

However, this tourism-focused flagship project needs to be seen in the context of McKinsey’s assumptions about Lebanon’s tourism sector and its envisioned trajectory from now until 2035. These aspects of the tourism plan in the LEV are elaborated on earlier in the document, on pages 802 to 851, and are anything but immune to fundamental questions. 

Tourists, tourists everywhere?

The McKinsey team—very optimistically—projects regular incremental annual increases in arrivals of 10 percent, from 1.9 million in 2017 to 4 million leisure visitors by 2025, as well as (presumably also annual) increases of 11 percent overall, to a grand total of 4.2 million tourists (leisure, business, and medical) in that same period. Under the McKinsey vision this number will increase to 6-7 million by 2035. This is not exactly intuitive, given that global tourism growth has been volatile but more on the side of acceleration, making it curious that the projected growth for the ten years of 2025 – 2035 is actually lower in absolute numbers than the seven-year LEV tourism ambition for the 2017 – 2025 period.

The implied drop in percentage increases—from 10 or 11 percent in the years up to 2025 to much lower annual percentage rates between 2025 and 2035—is not explained in the LEV and seems to assume that some sort of negative shock would have to occur, be it at a global (oil price, environmental crash?), regional (Israeli invasion, Islamist revolution, new American sanctions, universal Arab travel ban?) or local (state bankruptcy, mystery epidemic, mass emigration?) level. 

On the 2025 timeline, the excess of the total projected tourist numbers over the number of leisure visitors is explained through business travelers and medical tourists. However, given that the McKinsey plan acknowledges that the actual number of business visitor arrivals in its 2017 baseline for this ambitious tourism growth projection is not known, the reliability of projecting a goal of 200,000 business and 20-30,000 medical visitors for 2025 seems even more tenuous than the 10 percent annual growth projection of leisure tourists.   

The other two building blocks are medical tourism—a hotly contested realm with significant regional competition—and conference tourism. In the latter, known by the stupid acronym MICE (for meetings, incentives, conferences, and events), Lebanon once was a regional center of attraction. But that was in the previous millennium and before the commerce-in-the-desert hub Dubai started to roll out new five-star conference hotels at a speed that relates to Beirut’s hotel construction timeline like the number of lanes on Sheikh Zayed Road to those on Hamra Street.

Promotion of Lebanon for medical tourism was something that this writer interviewed concerned stakeholders on more than a decade ago, at a time when the regional conditions were much more favorable and a competitive advantage of Lebanese medical tourism destinations for European and Western Asian countries seemed almost feasible. In this regard, McKinsey’s vision seems misplaced.

Moreover, the projection of tourism arrivals on a steadily increasing trajectory has been a long-standing fantasy nurtured eagerly by Lebanese tourism stakeholders in the public and private sector. It just never happened, and the past two decades have cemented the understanding that betting on annual tourism growth is a very fickle gamble, even in prominent destination countries in the Southern and Eastern Mediterranean, such as Turkey, Egypt, or Tunisia, which have all witnessed significant fluctuations.

To specify the volatility of tourism streams in Arab countries in the Southern Mediterranean, it suffices to note that Egypt reported fluctuating tourist numbers ranging between more than 14.7 million in 2010 to less than 6 million arrivals in 2016  (data sourced from Singapore based data compiler CEIC). Moreover, in the 12 years from 2006 to 2017, Egyptian tourist arrivals showed only one two-year period of consecutive increases, meaning that predictability of annual tourism growth rates in this region looks like an exercise in pure economic mythology, because of the overwhelming impacts of risks that do not even have to be as large as nation- or region-wide civil unrests, as seen in the hottest phase of the Arab Spring.

In Turkey, another country with multiple tourism destinations, tourism inflows showed a volatile but broadly rising trajectory over the past 25 years. While the country recorded no more than 8 million annual arrivals before 2000, the annual count almost tripled to over 21 million by 2005 and rose continually from about 19 million in 2006 to over 41 million in 2014, before softening and again recovering in the period from 2015 to 2017.

In the case of Turkey, the country moreover sports a national tourism strategy that was devised initially for the 2007-13 period and then extended to the following ten-year period.  Under this strategy, with its updated targets and validity until 2023, numerous “alternative tourism” opportunities for the country are mentioned, including expo, eco, and health tourism.

In this Turkish tourism development plan, which entails focal tourism development zones, and tourism axes and corridors, there is mention of investments and government incentives under a vision to establish inbound tourism in Turkey as “world brand” and achieve a position among the top five countries (presumably globally) “receiving the highest number of tourist [sic] and highest number of tourism revenues by 2023.”

When an extremely large—in comparison with Lebanon’s—tourism market with a dominant position in the Eastern Mediterranean names health, eco, and MICE-related tourism projects as part of its national development master plan, it seems quite unwise and counterintuitive to design a Lebanon tourism vision without looking at upside and downside potentials in relation to the competition in this global neighborhood.  The LEV has a “case study” page referring to Turkey as offering an example of medical tourism development but makes zero reference to Turkey as a likely competitor for Lebanon’s medical or wellness tourism.

Taking the example of this tourism vision as one of the LEV five structural pillars, after a—admittedly not exhaustive enough—perusal of the contents leads this observer to think that many of the LEV concepts related to tourism appear worthy of much further study and adoption, and makes one foot twitch with the desire to kick the disparate bunch of public and private stakeholders in the tourism sector into LEV-congruent action.

But another part of the observer’s grey matter is greatly puzzled and unconvinced by the LEV’s tourism vision, due to the lacking analysis of the competitive regional environment, the failure to look at risks dispassionately and present balanced, SWOT-type, assessments of the volatile internal and external factors, and the economic baseline assumptions underlying the McKinsey elaborations on future tourism potentials in Lebanon.

Dreams without warranty

The LEV contains many ideas that cannot be discussed in this analytical foray, after only a preliminary peek—ideas related not only to tourism but also to the other proposed focus sectors (agriculture, industry, financial services, the knowledge economy, and the diaspora). The plan also entails much that deserves to be studied by public stakeholders, relating to governmental and administrative responsibilities and coordination needs, even as one has to ask if most of the political and administrative innovation and reform needs are not likely to be more problematic than the vision document lets on.

One must consider the value or danger of adding another layer on top of the existing bureaucracy to execute and implement the ideas put forth in the McKinsey vision, for instance where the LEV proposes the creation of the Performance Management and Delivery Unit (PMDU). It is such a bold attempt at producing improved coordination and efficiency by bureaucracy that it provokes sincere wonderment at the consultants’ overconfidence in this state’s ability to fast-track reform or project implementation.

Such measures bring to mind a similar political project more than 20 years ago. When the empowerment of the Council for Development and Reconstruction (CDR) was set on the political agenda the CDR was constantly clashing with other entities in the ministerial bureaucracy and created a huge bottleneck in terms of decision-making. The question remains whether the PMDU would achieve much more than just adding another layer of administrative bottlenecks in the Lebanese system and if it would, under the purview of the cabinet, perform any better as a coordinator of a national economic effort than the already overburdened bureaucratic entities that exist today.

The consultancy claims that its model “provides guidance on target-setting” and explains that it links its (individually mystifying) sector targets to their macroeconomic impacts through “simple linear regressions.” Even if that means that the plan might be appropriate for discussion in a profoundly disinterested 12th grade high-school setting or within a similarly inclined political class, can we really allow ourselves to be content with this?

After browsing the LEV a few times, the vision document cannot yet resolve the questions over inputs and processes concerning data integrity and quality, methodologies, and fundamental economic assumptions that can only be qualified as either prophetic chutzpah or deliberate whitewashing of what lies in darkness (even the alchemists of economic forecasting in multilateral financial institutions would not dare to try and sell a serious GDP hope with a horizon of seven or 17 years).

Moreover, the LEV gives ample room for detailed irritation with ambient consulting noises. Would Lebanese agricultural producers really benefit from acting upon the proposal to seek increased exports of bananas to Columbia, strawberries to Belarus, avocados to China, and lemons to Azerbaijan? Does it help in the development of our knowledge economy to be told in the LEV that digital hubs have been set up in places from Boston, Dublin, London, and Newcastle to Dubai and Abu Dhabi? What can Lebanon’s cultural and creative industries benefit from being reminded of the K-Pop phenomenon in South Korea and being told of the East Asian country’s musical exports in 2017, and what can farmers learn from a “case study” of Vietnam’s “agricultural transformation during 1990s [sic],” including “land reform”?   

There indubitably are many nuggets of inspiration worth mining from the LEV as Lebanon muddles through the next phase of its economic evolution. When answering Executive’s questions in an interview last month, then-caretaker Minister of Economy Raed Khoury emphasized that the LEV has central value toward the generation of governmental decision culture, a unified mindset, and common yardstick against which future governments would be able check their decisions. He further confirmed that the consultancy delivered all that was expected by the Lebanese government and that the entire output was the document that has been accessible since last month on the MoET website. “This is the best investment that has been [undertaken] by [this] government. [The] return on every penny is the highest in the government in many, many years,” Khoury enthused. 

As firm as the minister’s confidence is, it does not solve questions such as if and how McKinsey could be held accountable if the promises of its plan were to prove unattainable or even faulty, or whether the government’s outsourcing of future socioeconomic plans and thus societal contract formulation is equal to a relinquishing, to a non-elected commercial power, of its responsibility and its mandate given by their electorate.

Finally, as the never-ending political theater show in Lebanon is now in another year and looks fully set to play out with too many intrepid actors and haphazard moves (irrespective of the formation and composition of its next Council of Ministers, which occurred in the last throws of the month, just as this magazine went to print), it might only become evident four or five years from now if the LEV was a great investment or just another outdated script and unfulfilled dream.    

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

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